Titling the Inherited IRA

Question: I attended your recent presentation at the Notre Dame Tax & Estate Planning Institute. In "The Fiduciary's Guide to Retirement Benefits" and the seminar material, you suggest that the fiduciary should (promptly after the participant's death) rename an IRA account to be titled "John Doe, f/b/o Estate of John Doe" or "XYZ Bank, Executor of the estate of John Doe, as beneficiary of John Doe." Why do you recommend such retitling at the time of death, and what are the benefits of such retitling?

Answer: I'm sorry I didn't make this clearer in the seminar presentation! Here's what "retitling" is all about.

Suppose John Doe dies, leaving his IRA to "my estate" as beneficiary, or fails to name any beneficiary, causing the estate to become the beneficiary of the IRA by default. Now the estate "owns" the IRA as beneficiary, but the executor has not established that ownership with the IRA provider. As far as the IRA provider is concerned, this account still belongs to John Doe. It will take instructions only from John Doe. Once the IRA provider realizes that John Doe is dead, it will not take instructions from anybody until the account beneficiary shows up and establishes his or her identity.

This is required for any beneficiary of an IRA of a deceased person. In the particular example I discussed at the seminar, the beneficiary of the IRA happened to be the estate of the deceased participant, so I'll illustrate with that.

Suppose Rita Roe has been duly appointed as executrix of the estate of the deceased IRA owner John Doe. As executrix, Rita wants to start getting the monthly statements for the account and otherwise take control of it, maybe to sell the investments inside the IRA or take a distribution from the IRA. But she can't do any of these things until the account is formally registered in the estate's name on the IRA provider's books. If she just calls up the IRA provider and says, "Hi! I'm the executrix of John Doe. Please send me some account statements and, by the way, sell all the IBM stock and send me a distribution for $10,000," the IRA provider will say, "Who the heck are you?"

In short, the IRA provider will not deal with the executrix until the account has been formally retitled, or reopened, in the name of the estate. As of now, the only "customer" the system recognizes is John Doe. The executrix is "nobody" until she:

--Presents her certificate of appointment to the IRA provider, to prove she is entitled to act for the estate of John Doe.

--Gives the IRA provider her name, address, email address, and phone number, and the tax ID number of the estate, so they can communicate with her and do the IRS-required reporting for this account.

Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is a leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.